Market Update 15/5 - Worrisome Investor on Retail Company Earnings as Consumers Cut Back Spending

Worrisome Investor on Earning as Consumers Cut Back

There has always been a general perception that the grocery industry is a staple stock since it is mostly known as a stable stock that hardly changes in value over the course of time, and is not affected by fluctuations in economic conditions. It must be noted, however, that with the influx movement of high inflation environment, along with the technological advancement of artificial intelligence and delivery system advancements? Are grocery company investing sentiments still valid?

Not to mention that retail companies struggling with increasing labor costs, inventory management, real estate price hike, and energy cost on top of raw material prices had made the company divert to innovate and move along with their customer preferences and needs.

The focus of this week’s earnings will be on retail companies, including Target, Walmart, Costco, and Alibaba.

Why Do Investors Invest in Grocery Store Stocks?

Consumer staples are one of the most attractive defensive sectors to invest in because they are a good bet no matter what the weather does. Regardless of whether there is a bull market or a bear market, there is always a demand for the goods and services that grocery store stocks provide, since food is a basic need that people cannot live without.

In this case, the main question is, will customers’ purchasing behavior change? As an example, one can switch from organic vegetables to regular or frozen vegetables. It is also common for users to change to a cheaper version of a hygiene product, such as toilet cleaner, detergent, and more, as soon as the price reduces. As a result, will this have an impact on the sales and revenue of major retail companies?

Read: Household Goods Stock to Invest in 2023

What Are the Risks of Investing in Grocery Store Stocks?

However, in spite of this fact, some investors, especially day traders, do not prefer these types of businesses in their portfolios. This is because they believe it is a slow or small capital gain opportunity. There is a common practice among large grocery chains to use their pricing leverage in order to shift the burden of increased costs of goods sold to their customers.

In addition, they heavily rely on their existing workforce. Strikes or wage pressures could cause the retail store to suffer huge losses as extra costs and lower profit margins threaten its already low margins.

Publicly Traded Retail Company Stocks in the US.

The low volatility and consistent revenue streams provided by the top grocery stores chains such as Walmart and Target, investors will be able to weather any storms that arise. Moreover, these grocery chains have demonstrated their ability to adapt to changes in consumer behavior and economic conditions by developing proprietary e-commerce platforms to offer home delivery.

WALMART (NYSE: WMT)

With a presence in nearly every country and a market share that continues to grow, Walmart is among the world’s largest grocery chains. By combining supply chain management, operational excellence, and technology, the company has been successful in optimizing sales and customer service. The grocery chain is well-equipped to survive any macroeconomic downturn due to automated warehouses and inventory tracking systems. Walmart can pass on existing cost savings to customers and offer competitive prices while still ensuring healthy profit margins of about 3% by developing an extensive network of suppliers and distributors and implementing strict quality control standards for all products sold in stores.

As of May 2023, Walmart has a market cap of $412.88 B, an increase of 7.98% compared to 2022. Unlike other companies that experience downturns during a pandemic, Walmart has experienced constantly increasing revenue growth since 2010. In 2022 the company made a revenue of $600.11 B an increase over the year 2021 revenue that was of $571.96 B.

COSTCO (NYSE: COST)

Second-largest retailer Costco offers consistently low prices, high-quality merchandise, and excellent customer service. Like other grocery stores, Costco has razor-thin margins and maintains attractive pricing strategies, but it stands out in two areas, bulk sales and membership-based warehouse clubs.

Designed with high ceilings, concrete floors, and large open spaces to accommodate bulk products, the company’s stores are simple. Customers of Costco have access to exclusive discounts and deals by paying an annual membership fee. Costco’s membership model also creates a sense of exclusivity and loyalty among its members, who feel compelled to shop there for their everyday needs to maximize their benefits. Additionally, Costco’s bulk purchasing strategy allows it to negotiate lower prices from suppliers, allowing it to offer its customers criminally low prices while still making a profit.

As of May 2023, Costco has a market cap of $223.54 B, an increase of 10.33% compared to 2022. Except for 2022 and 2016, Costco’s market cap managed to keep on constant double-digit growth since 2010. In 2020 the company made a revenue of $172.92 B an increase over the years 2019 revenue that were of $154.67 B. Costco annual revenue for 2022 was $226.954B, a 15.83% increase from 2021.

TARGET (NYSE:TGT)

Through a strategic approach that appeals to customers, Target Supermarkets has been able to maintain its popularity among other top grocery store chains. Target offers a one-stop-shop for customers that goes beyond conventional big-box retail shopping visits by offering competitive prices, same-day delivery, and a quality online shopping experience via its e-commerce website, as well as additional services such as contactless and same-day delivery.

Through investments in advanced technologies such as sorting center automation and artificial intelligence, Target’s aggressive cost-cutting measures have allowed it to reduce expenses while maintaining its attractive customer service standards.

As of May 2023, Target has a market cap of $72.92 B, an increase of 6.29% compared to 2022. In 2022 the company made a revenue of $108.72 B an increase over the year 2021 revenue that was of $103.34 B. The company had consistent positive revenue growth since 2018.

A stock in the sunshine - ALIBABA (NYSE:BABA) gives hope to the to the retail industry.

Alibaba’s two largest Chinese online marketplaces, Tmall and Taobao, facilitate consumer-to-consumer and business-to-consumer transactions. Transaction fees and advertising fees for promoted listings are the main sources of revenue for both companies.

In the first nine months of fiscal 2023 (which ended in March), Alibaba generated 87% of its revenue from commerce and logistics. The remaining 4% came from its digital media business, which owns the streaming video platform Youku Tudou, and another 9% from Alibaba Cloud, the largest cloud infrastructure platform in China.

What make BABA share more attractive?

BABA plans to IPO some of its business units to raise funds for growth and realize value for shareholders. Apart of its expansion in 2022, the company recorded green double-digit revenue growth since 2014.

Bottom Line

Investing in retail stocks ahead of earnings has benefits. This includes stability, consistent demand from the masses, and attractive dividend yields.

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